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Monday September 3, 2007
POLITICAL ESSAYS
The Con Artist - Part 5
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Under the September 2d headline "[Russian Federation] Presi-
dent Reassuring About Stock Market," Kommersant quotes Putin:
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"For us, it wasn't such a critical fall, but more like a cor-
rection with regard to the previous unprecedented growth...."
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Under the August 31st headline "Foreign Debt Weighing on VTB,"
Moscow Times reports:
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"[The brokerage firm] Troika Dialog...voiced fears that VTB,
the country's second-largest bank, would be hard hit by the
higher costs of refinancing [= rolling over] its debt amid
the global credit crunch."
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How's that?
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The Times quotes a brokerage banking analyst:
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"The bank has far greater exposure to wholesale funding."
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Wholesale funding? Wholesale borrowing as contrasted with
retail borrowing.
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Retail borrowing? When ordinary people deposit money in a
bank, they imagine it's something only *they* are doing.
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But once the bank's got that money it looks at things from
*its* point of view: it pays a small bribe to those deposi-
tors so they'll leave that money in the bank. That bribe
is called interest.
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However, the bank knows that sooner or later some of these
ordinary people will withdraw all or part of their money.
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The bank perceives that its bribe is no guarantee, and that
the deposits are only borrowings by the bank.
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So the bank quickly lends out most of its borrowings to those
who gotta have green. Those folks will have to pay a higher
interest rate on *their* borrowing.
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What happens when total retail deposits decline (as they have
over the years) while demand for loans keeps shooting up?
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Banks go for all kinds of wholesale borrowing.
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As the Comptroller of the Currency told the Senate Banking
Committee in 2001:
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"In response to the long-run, secular trend of slower deposit
growth, banks have turned increasingly to higher interest rate
wholesale funding."
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In The Superpower, how's that done?
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"While large banks are accustomed to accessing the capital
markets for funding, this is a new activity for many smaller
banks.
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Because of costs and [con game] information constraints, small
banks find it more difficult than large banks to raise funds
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through public debt offerings [stocks, bonds],
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securitizations [good and bad securities wrapped together],
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and other [structured finance] capital market instruments.
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Thus, we see that small banks are increasingly relying on
wholesale providers such as the Federal Home Loan Banks as
well as deposits obtained through the Internet or CD [Certi-
ficate of Deposit] listing services."
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Back to VTB--
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"More than 30 percent of VTB's liabilities are made up of
foreign debt and syndicated loans [from listing services],
Troika said...."
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"This compares to just 5 percent at state-controlled Sberbank,
the country's largest bank."
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It's interesting that VTB "raised $8 billion through the sale
of 22.5 percent of its stock in May [this year]...."
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It's really going to town. Or to hell.
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By the way, is it borrowing from The Superpower?
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Better look into that, Vladimir Vladimirovich.
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Kommersant:
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http://www.kommersant.com/p797220/r_528 ... s_finance/`
Moscow Times:
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http://www.moscowtimes.ru/stories/2007/ ... print.html`
Comtroller:
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http://banking.senate.gov/01_06hrg/062001/hawke.htm

Interesting, jaspar! The housing market is going through the bottom...and it's being felt even in my neck of the woods where homes have been selling for over a million bucks if the property had any water on it, such as a stream, a river, or access to a lake or had a lake view. Not so anymore. Homes are sitting unsold.